The Ellis Martin report interview with Simon Moores

TEMR: I’m Ellis Martin. Join me for a conversation with Simon Moores, an analyst at Benchmark Mineral Intelligence, a London-based consulting and research firm focusing on niche critical and industrial minerals and metals. The company analyzes battery raw materials including graphite, lithium, cobalt and vanadium. Benchmark also follows major industrial markets, emerging industries and disruptive technologies, such as EV batteries as well as wind, solar and fracking issues. Simon welcome to the program. Thanks for joining me today.

Simon Moores: Hey Ellis it’s great to be here. Thank you.

TEMR: It’s been suggested to me Simon that the production of lithium-ion batteries for automobiles, while being economic perhaps for consumers, if you don’t include the cost of the vehicles themselves, still higher than the cost of a petroleum run vehicle these days. It’s been suggested that the so-called carbon footprint to produce these batteries and these vehicles is heavier than gasoline powered vehicles. What are your thoughts?

Simon Moores: I think the first thing is that electric vehicles are really new. That’s the one thing that I think people need to first understand is even though we use the hybrid vehicles and even some plug-in hybrids and range extenders, pure electric vehicles are very new. It’s a bit hard I would say to judge the standards where they are today with the standards of gasoline powered vehicles at present. In terms of battery, the impact— the future impacts of battery production, the history of batteries are relative complex supply chain of lots of minerals and metals, like lithium, cobalt, nickel, which are heavily processed into their chemical form usually, which then are made into batteries, which are then are made into packs and into cars. I think to compare it to gasoline vehicles fully you have to break down into every component of what is a complex engine and then make a fair comparison. Everything, when you’re making a car, is relatively complex. I think overall electric vehicles are simpler versions of their gasoline counterparts. These are quite complex vehicles to produce regardless whether it’s an EV or a gasoline vehicle. I guess the only thing that electric vehicles have in their advantage is that they, as soon as they’re on the road, they don’t burn gasoline.

TEMR: But what about the potential damage of coal-fired plants that are still being used to produce these batteries? I’m just taking the cause of the environmentalist, not necessarily being one in those terms potentially, but these are some of the things I’m hearing and these are some of the things I think we need to overcome in the sector.

Simon Moores: Yeah. I mean, I guess it depends. That’s a good question for energy storage actually powered vehicles and utility storage— utility batteries is, what are you putting in there to store— where’s that energy coming from? Is it coal-fired power plants? Is it from solar? Is it from wind energy? That’s a really good question. I think overall it’s a tough one and complex one to answer. Overall being able to store energy and becoming more efficient with the way we use it instead of just wasting. At the moment you generate energy if it’s not used it’s wasted. I think the fact you’ve got energy storage is an overall good thing for the environment. It means we’ve become much more responsible with how we use energy regardless of where it comes from.

TEMR: You mentioned how complex the system using to construct these batteries and the batteries themselves and the vehicles. These are early days. Let’s just say that even though electric cars have been around for several years and the technology is not necessarily new, these are still early days with regard to evolving technology. Do you expect this method of energy storage to become a lot simpler and a lot less complex as time moves on?

Simon Moores: Yeah I think so. I think the battery industry is (inaudible) and the way people make batteries and simplifying the supply chain. You know, Elon Musk said it himself, you can’t send these minerals and metals on around the world trips without them being expensive and increasing the CO2 footprint of batteries, which is why you look at a model like the Tesla Giga Factory, the reason that’s special isn’t necessarily the size because there are 7 of these 14 mega factories that are being built in China, one of which is actually bigger than Tesla. The reason it’s special is because of what they’re trying to achieve there. They’re trying to condense the battery supply chain under one roof where they put raw materials in the battery in one end and cars roll out at the other end. The success or failure of that model will hopefully become the future of this new age battery sector and that’s certainly one you’d want to watch.

TEMR: I understand Simon that the supply of lithium on the plant is quite plentiful. However, how problematic is it for these junior mining companies, many of them in North America, to develop some of the properties? Let’s say they secured in Clayton Valley, Nevada as compared to Argentina or Chile. What does the producible supply look like compared to the upcoming demand and how will this affect prices?

Simon Moores: Yes. The supply on the market for the next 4 years is going to be tight because demand is very, very strong and it’s not slowing down. We do anticipate new supply from— a (inaudible) supply coming from hard rock spodumene sources. This will be Galaxy Resources, Neo Metals, which are now up and running. Then companies, like Nemaska, will be coming into the space into 2018 from hard rock. From a brine perspective, that takes a lot longer to get up and running. The only next brine we expect to be in production will be Lithium Americas in Argentina. That will be by around 2020. There’s still not enough lithium to satisfy the demand so really you got to look at all the other exploration players out there for the window of between 2020 and 2025 because the demand from the battery sector isn’t going to slow so it’s a question of when and what timeframe will the new lithium exploration plays react.

TEMR: How careful are you with regard to investing in some of these junior mining companies in the lithium space and what advice would you give to our audience when considering doing so?

Simon Moores: At Benchmark we don’t do that. We’re an independent publishing company and we don’t and can’t invest in any companies that we report and be impartial and collect data on the industry, certainly prices. I would say the advice I can give when looking at these companies would be you’ve got to understand the lithium markets, but it’s not a commodity. It’s not as easy as building a mine and you can produce lithium that’s used in the battery. There are many steps to make battery grade lithium, which can be quite complex to then get that battery grade lithium qualified by battery companies and that’s— at the end use they can take this process and actually take a long time and then you have to ramp up after that. I think it’s not a commodity. It’s a specialty mineral and understanding that complexity is a good start to lithium investing.

TEMR: Well, I’m just going to say it’s potentially very risky then.

Simon Moores: It is risky because, I mean, lithium is a great industry to invest in. It’s a great industry. A lot is happening on the battery side, but you’ve got over a hundred lithium juniors out there of which only the top 5% will make it. It’s a question of which ones will make it. That’s because of doing your own research, looking at the facts and taking it from there.

TEMR: What do you know about recycling these batteries when they expire in 10 or 20 years? What kind of talk is there in the industry and what are you seeing and what answers are there?

Simon Moores: Good question. Recycling is the answer. The question is, when and why would people recycle? We think it’s a 10-year horizon before it becomes a serious source of supply or let’s say a serious industry. The two reasons why people would want to recycle is two, because they have to. Will governments say, you’ve got to dispose of your lithium-ion batteries inside cars and that will force people to recycle. The second is a reliable and relatively cheap source of raw material, which at the moment there is not. Recycling is the answer. This isn’t an issue or major issue until I would say post-2020.

TEMR: Let’s talk about cobalt. That’s a story which has yet to see some big legs, but I think behind lithium it’s a big story and considering the amount of cobalt used in batteries and other industrial arenas. The story basically with some of these junior mining companies has been purveying their resources against the supply basically, which is coming out of the Democratic Republic of Congo and then that being monopolized by China. That story is basically driving or attempting to drive cobalt stocks. What are your thoughts about that?

Simon Moores: Yeah. Cobalt is the most niche of all battery raw materials. The key ones we would look at would be lithium, graphite, nickel and cobalt. Of those four, cobalt is the most niche at 100,000 pounds a year. It makes it even more problematic when 60% of that is coming from the DRC, from the Congo in Africa. There’s many problems with the DRC. Artisanal mining is one of them. Part of that artisanal mining is illegal mining. Some children are used to extract cobalt, but it’s a very, very small portion of this artisanal mining sector and it’s, kind of, stigmatized cobalt really. I think the real story in cobalt is that it’s tied to copper and nickel mining. With the fortunes that those industries have been improving recently but they’re not doing very good the last 2 years. The cobalt industry is going the opposite direction because of batteries it’s going upwards. There’s going to be a crunch point at some time. That crunch point that people are waiting for where cobalt’s price is starting to rise. Then if you look at the price of cobalt metal on the LME, well, the last 12 months it’s gone up 60%. Historically, it’s been quite low for a long time as well. The question is, is it the start of a cobalt price spike? Is it just a price correction on what were historically low cobalt prices? All of these questions are what people are going to be answering hopefully in the next 2 to 3 months.

TEMR: Do we have enough storage capacity for all the sources of energy coming online now? I’m talking about solar, wind, of course, everything related to what we’ve been discussing with regard to lithium storage. Is that in place yet? Will it become in place fast enough or will we see a surge in companies jumping to produce these large and small energy storage facilities?

Simon Moores: Yeah it’s a good question. To answer it know there’s not enough storage capacity at all at the moment. We’re just seeing the start of the growth in the lithium-ion battery industry. Last year for us that was 70 gigawatt hours of production. We think from a capacity of about 120 gigawatt hours. There isn’t enough even with the battery industry running at capacity there’s nowhere near enough to store the solar and the wind that’s being produced. What we are seeing is the start of significant projects from utility storage in places like Hawaii and in California where lithium-ion batteries are being deployed in big shipping crates inside containers and being used to store solar over there. The industry is starting to see some signs of life for utility. Really for us that’s going to be more interesting post-2020 when you will have an abundance of low-cost lithium-ion batteries on the market. At present the lithium-ion battery industry isn’t there and therefore we’re not quite seeing the knock on effect yet into utility energy companies.

TEMR: Much like computer storage, data storage having become smaller over the decades, do we see something like that in line for energy storage as well?Simon Moores: Well, in electric vehicles no, but in utility storage it’s a very interesting market. It’s complex. There are many levels to it. There’s a lot of politics involved in it. It’s a far riskier business. It’s a far greater opportunity in the long-term in electric vehicles. Of course, these are container size batteries 100 megawatts to 300 where a car is 80 to 100 kilowatt hours in size. (Inaudible) bigger. It’s froth with complexities, especially in North America. Only time will tell and we believe post-2020 we’ll start seeing some signs.

TEMR: Let’s talk about graphite. Several years ago we saw a bubble, perhaps a bubble that was never really sustainable. Should we be looking at graphite stocks now or should we wait?

Simon Moores: I think the graphite stocks you should look at now are the ones that are going to be value adding into lots of downstream materials. You saw a bubble in 2011 for a number of reasons. One was supply which was brought off-stream after the global economic crash. Then it rebounded back much, much quicker than anticipated. The emergence of the battery anode industry, spherical graphite happened at the same time and it caused a supply squeeze, which caused the price to rocket 3½, 3 times. I think the future of graphite for new companies has to be in value added, has to be in battery added materials. The ones that okay, they have a good resource that’s all in the positive, but they have to have the business plan and the know how to make that spherical graphite material, which is used in batteries, which then gets qualified by the battery industry. Any company that can tick those downstream value added boxes will have a future and will always be a promising investment prospect. Anyone that just wants to do a traditional mining game for graphite will always have to compete with China on raw material cost and China’s the biggest producer of graphite. We foresee that for at least the next 10 years. Nothing really is going to change there so you have to compete on quality. That’s really how I see the future of the industry.

TEMR: Would you say that with regard to lithium, cobalt and, of course, graphite, is North America always going to be competing with China?

Simon Moores: I think so. China’s is a big buyer. Maybe as a producer it’s slightly different because, for example, with lithium China buys it— imports maybe all of it’s lithium. Graphite has the fortune of being able to produce it there. It’s trying to now dominate the battery grade graphite sector as well. As a buyer, you’ve got the— from the battery industry really it’s a China versus U.S. thing at the moment. When we look at our battery mega factories that we track at Benchmark, 14 in total, 2 of which are in the U.S., 7 of which are in China and the rest are shared between Japan, Korea and Europe. Really these are our demand hubs going forward. For sure it’s turning into a U.S. versus China story for batteries and also for electric vehicles.

TEMR: Speaking of Japan, Korea, that part of the world, and let’s talk about Australia for a minute, rare earths, rare metals, some of the things we’ve discussed. How, if at all, is mining turning around in that area? With regard to off-take, do you see Australia lifting itself up again much like Canada is beginning to do?

Simon Moores: You’ve certainly seen positive signs in the lithium space for Australia. You’ve seen lots of hard rock spodemune projects gaining ground and making off-takes with China. I think the problem with Australia mining as a whole is they were completely tied to the fortunes of the Chinese. They tend to go up and down with the Chinese economy. That’s something I think a lot of Australian mining companies are looking to diversify from, certainly with lithium. Lithium is the opposite. It’s very much tied to China. Australia’s mining industry as a whole is going to have, kind of, an upturn or better fortune like Canada’s experiencing and really they’ve got to either wait for the Chinese economy to start improving or they’ve got to diversify.

TEMR: Simon let’s take a look at the future of lithium prices. What do you see in the short-term and long-term?

Simon Moores: In the short-term and long-term, the next 4 years we believe the lithium price will remain high. We get asked lots and lots of questions on whether the price of lithium hydroxide and lithium carbonate will start falling or crash from the highs that we’ve seen in the last 18 months. Because of the demand from the battery sector it’s our belief that prices might taper out a bit, but they’re still going to remain high. Actually we’ve got them rising throughout this coming year. We’ve only got a slight tapering off of carbonate prices by the end of 2020. Because that’s something we track at Benchmark Mineral Intelligence every month, it’s quite interesting to see that we won’t expect a lithium price crash anytime soon.

TEMR: Simon it’s been a great pleasure having this conversation with you today. I look forward to revisiting with you in a few months. Thank you so much for joining me today on the program.